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ACCA Applied Skills · Financial Management · Stakeholders and impact on corporate objectives

In a listed company, the directors who run the business are not the shareholders who own it. Which of the following best describes the agency problem that arises from this separation?

The agency problem is the risk that managers, who act as agents for shareholders, pursue their own interests such as pay, status or job security instead of maximising shareholder wealth, because ownership and control are separated in the company.

  1. AManagers may pursue their own interests rather than maximising shareholder wealthCorrect
  2. BShareholders may be unable to sell their shares quickly on the stock market
  3. CLenders may demand a higher interest rate because of the company's gearing
  4. DDirectors may be required to disclose too much information to the public

Explanation

The agency problem arises because managers (agents) make decisions on behalf of shareholders (principals) but may act in their own interests, for example by seeking higher pay or job security. The other options describe liquidity, cost of debt and disclosure issues, not conflict between principal and agent.

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